California Public Utilities Commission: Decision 13-10-074
Recent Developments: CPUC issued order denying rehearing and upholding the interconnection requirements in the State’s RPS; Cowlitz did not file an appeal in State court within the 30-day window.Case Documents

Case Summary
In 2011, the California Legislature amended the state’s Renewable Portfolio Standard. Under the amended RPS, retail sellers must supply at least 50 percent of the mandated renewable energy from generators that connect to a California balancing authority or have an agreement to do so.

Cowlitz Public Utility District, located in Washington, sought rehearing of the Public Utility Commission’s order implementing the RPS amendments. Cowlitz PUD argued that the connection requirement discriminates against out-of-state generators. The CPUC rejected Cowlitz PUD’s claim, noting that boundaries of California balancing authorities extend beyond the political boundaries of California. Some out-of-state entities will be able to connect, and the fact that others will not be able to connect does not demonstrate discrimination under the Commerce Clause.

The CPUC also asserted that the statute is not facially discriminatory because it does not draw any distinction between in-state and out-of-state generators or create any preference or benefit to in-state generators. The CPUC also found that the new categories in the RPS do not have a discriminatory purpose. Instead, the purpose is to ensure that California end users actually receive electricity generated by renewable resources.

Case Summary
California’s Low Carbon Fuel Standard (LCFS) requires a 10 percent reduction in the carbon intensity of transportation fuels supplied or offered for sale in California by 2020. Fuel producers and importers must meet average carbon intensity requirements each calendar year, based on a life cycle greenhouse gas analysis of their fuel.

Plaintiff farmers, ethanol producers, and oil companies challenge the law as unconstitutional under the Supremacy Clause and dormant Commerce Clause. With regard to the Supremacy Clause, Plaintiffs argue that the LCFS is preempted by Clean Air Act provisions establishing the national Renewable Fuel Standard, which requires that gasoline include a certain percentage of ethanol and other fuels. States defendants respond that the LCFS is not preempted because California is the only State permitted under the Clean Air Act to seek a waiver of federal fuel standards and enact its own more stringent standards.

Plaintiffs also argue that the LCFS violates the dormant Commerce Clause in at least two ways. First, they allege that the LCFS regulates fuels produced outside of California and is therefore an “extraterritorial” regulation that interferes with interstate commerce. Second, they claim that the life cycle greenhouse gas analysis discriminates against out-of-state ethanol producers because fuels transported long distances and produced in regions powered by coal-fired electricity could receive a higher carbon score.

State defendants, supported by environmental group intervenors, respond that the LCFS does not regulate extraterritorially but instead regulates in-state ethanol producers and brokers that sell fuels in California. Defendants argue that out-of-state producers are affected only to the extent that they voluntarily choose to sell into California. The LCFS does not prohibit ethanol with higher than average carbon intensity but instead permits such ethanol to be offset with credits generated by ethanol with lower than average carbon intensity. In addition, State defendants say the driving force behind the LCFS is not economic protectionism, but concern about climate change and its effects on the health and welfare of California citizens.

In late 2011, a Federal District Court judge in the Eastern District of California ruled that the LCFS violated the Commerce Clause because it constituted extraterritorial regulation and discriminated on its face against out-of-state ethanol producers. The Judge noted that while California has special status under the Clean Air Act, its status does not immunize its laws from the dormant Commerce Clause. The District Court declined to decide whether California’s program is preempted by Federal statutory provisions relating to the Renewable Fuel Standard. State defendants appealed.

In September 2013, a Ninth Circuit panel reversed the lower court on most grounds, overturned the District Court’s rulings of unconstitutionality, and remanded the case for further proceedings. The panel majority overturned the District Court’s ruling of facial discrimination, agreeing with the State that what determines a fuel’s regulatory treatment is its carbon intensity, rather than its geographic origin. The Court pointed out that some out-of-state ethanol producers received lower carbon-intensity scores than some in-state ethanol producers. The Ninth Circuit also observed that California had adopted a lifecycle carbon analysis model designed by scientists at a national lab. The Court concluded that the LCFS does not operate extraterritorially because its requirements are limited to fuels sold in California.

While the Court concluded that the LCFS was not per se unconstitutional, it directed the District Court to evaluate the factual evidence to address the claims that had not been addressed on appeal, including whether the LCFS is discriminatory in its effects, and whether the LCFS places a burden on interstate commerce that is “clearly excessive” in relation to its local benefits.

Plaintiffs’ rehearing request was denied by the Ninth Circuit in January 2014. Seven of the Court’s 28 active judges dissented, however, explaining why they would have granted en banc review of some or all of the issues. The U.S. Supreme Court denied Plaintiffs’ petition for certiorari.

Case Summary
In 2006, the California Legislature required each investor-owned electric utility to offer a “standard tariff” (also known as a feed-in tariff) for renewable energy facilities owned and operated by a public water or wastewater agency. The Legislature subsequently expanded the program, requiring the utilities to offer standard tariffs to any renewable energy facility smaller than 3 megawatts, setting a statewide cap of 750 megawatts, and ordering the California Public Utilities Commission (CPUC) to establish a methodology for setting the tariff rate.

In its order setting the tariff rate, the CPUC acknowledged that the Federal Power Act grants exclusive jurisdiction to the federal government to set wholesale electric rates, unless a state is following the requirements of PURPA (i.e., setting a rate only for “qualifying facilities” as certified by FERC, and making that rate consistent with the utility’s “avoided costs”). The CPUC made the tariff available only to qualifying facilities and set the initial tariff rate equal to the price generated by a renewable energy solicitation program that it administers under separate authority from the Legislature. According to the CPUC, using this price “is the most reasonable alternative to determining the cost of the resources being avoided” by the eligible facilities. The initial price can be adjusted every two months depending on the number of projects that have accepted the tariff.

In 2013, Winding Creek, a proposed one megawatt solar facility in California, filed a petition with FERC requesting that it initiate an enforcement action against the CPUC. According to the petition, the tariff should be preempted because it is inconsistent with Federal Law. Winding Creek argued that under PURPA the tariff rate must be based on factual determinations about a utility’s avoided costs. Petitioners also claimed that other aspects of the tariff, including the 750 megawatt cap and bimonthly adjustments to the rate, are inconsistent with PURPA.

After FERC declined to initiate an enforcement action, Winding Creek filed a complaint in federal district court. The court dismissed the complaint twice, holding that Winding Creek lacked standing, but allowed Winding Creek to amend. Winding Creek filed its second amended complaint in June 2014. In February 2015, the court largely rejected the CPUC’s motion to dismiss, holding that Winding Creek has standing under PURPA and that Winding Creek had articulated a plausible claim.

In December 2017, the court held that Re-MAT is preempted because it is inconsistent with PURPA. The court focused on two of the law’s requirements: 1) Utilities have an obligation to purchase from qualifying facilities (referred to by the parties as the “must-take obligation”); and 2) FERC’s regulations require that generators be provided with the option of selling at a rate based on the “utility’s avoided costs calculated at the time of delivery” or “avoided costs calculated at the time the obligation is incurred.”

Regarding the statewide cap, the court stated that “it does not require significant legal analysis to conclude that CPUC’s imposition of caps in the Re-MAT program violates the must-take obligation.” The court found the pricing issue similarly “straightforward” – “prices generated by the Re-MAT program’s reverse auction procedure do not satisfy the definition of ‘avoided costs’ in FERC’s regulations.” According to the court, the “complex auction procedure burdened with arbitrary rules. . . strays too far from basing prices on a utility’s but-for cost, which the statute and regulations require.”

The state’s primary defense was that it’s “standard offer contract” meets PURPA’s requirements. FERC has determined states may offer rates that depart from FERC’s PURPA regulations if the state also has a PURPA-compliant option. (See 146 FERC 61,192). The court, however, found that the CPUC’s standard offer contract does not satisfy FERC’s requirements because it does not offer a rate based on a “utility’s avoided costs calculated at the time of delivery.”

__________
US v. California
Recent Developments: US Government filed complaint in October 2019Case Documents

The U.S. Government filed a complaint in the Eastern District of California against California, its Air Resources Board (CARB), the Western Climate Initiative (WCI), and various officials alleging that they “have pursued, or are attempting to pursue, an independent foreign policy in the area of greenhouse gas regulation.” The Government alleges that the state’s agreement with Quebec linking their two greenhouse gas cap-and-trade programs violates the U.S. Constitution. It asks the court to invalidate only the agreement and California regulations that implement the linkage between the two programs. If the U.S. government ultimately prevails, California’s program would remain operational.

California’s cap-and-trade program went into effect in 2013. It requires large emitters, including electricity generators, industrial facilities, and distributors of transportation fuel, to turn in allowances or offsets for each ton of carbon dioxide they emit. In April 2013, CARB made certain findings about Quebec’s cap-and-trade program and committed to link the two programs. In September 2013, California and Quebec officials signed an agreement that committed each jurisdiction to “work jointly and collaboratively toward harmonization and integration” of their greenhouse gas reporting and cap-and-trade programs. In 2014, California and Quebec began holding joint auctions for emission allowances and allowed covered entities in California to use such allowances to comply with California’s program. In 2017, the parties terminated the September 2013 and signed a new “Harmonization and Integration” agreement that allowed for inclusion of additional parties. (See Attachment B to the complaint).

The U.S. Government claims that California’s linkage with Quebec “intrudes into the federal sphere” and has “undermined the ability of the federal government as a whole, and the President in particular, to properly reconcile the protection of the environment, promotion of economic growth, and maintenance of national security.” California’s intrusion “complexifies and burdens the United States’ task . . . of negotiating competitive international agreements” and has “had the effect of enhancing the political power of that state vis-à-vis the United States.” WCI, according to the suit, is “aiding and abetting the other Defendants’ unlawful actions” and should therefore be subject to any injunctive relief.

The U.S. Government claims four violations of the U.S. Constitution. First, the agreement with Quebec “constitutes a ‘Treaty, Alliance, or Confederation’ in violation of the Treaty Clause.” Second, if the agreement is not a “Treaty,” the U.S. Government claims it is an unauthorized “Agreement or Compact . . . with a foreign Power” under the Compact Clause. Third, California’s actions “fall outside the area of any traditional state interest” and “implicate the conduct of foreign policy,” and are therefore preempted by the Foreign Affairs Doctrine. Fourth, because allowances and offsets may be used for compliance only in California and Quebec, the agreement “discriminates among categories of foreign commerce on their face” in violation of the Foreign Commerce Clause.

In March 2020, the district court in California granted the state’s motion for summary judgment on Treaty Clause and Compact Clause claims. On the Treaty Clause, the court emphasized the “independence” of the California and Quebec cap-and-trade programs. The agreement itself recognizes “each Party’s sovereign right and authority to adopt, maintain, modify, repeal, or revoke any of their respective program regulations or enabling legislation.” The district court also concluded that the agreement does not exhibit the “classic indica of a compact” as outlined by the Supreme Court. The agreement does not require reciprocal action to take effect, does not create an organization with regulatory authority, and does not authorize California to exercise any power it would not otherwise have.